Firstpost

By R Vaidyanathan

On Friday, the Union government sought a review of the Supreme Court’s order constituting a Special Investigative Team (SIT) to probe the issue of black money stashed abroad. The government believes this is judicial over-reach, but it forgets that the courts stepped in because of executive “under-reach.” It is one thing to object to a Supreme Court-appointed SIT, quite another to be SITting on your hands doing nothing.

But stashing money abroad is not just about the government not earning its share of tax revenues. It is actually a vote of no-confidence in the country and its people. Hence, it is financial skulduggery. Here’s the second part of our Dummy’s Guide to Tax Havens and Black Money in which we explain how black money is generated and spirited away. The first part was published by Firstpost on 3 June.

What is black money and how is it generated?

It’s not the colour of the currency, for sure. Income generated by illegal means and on which no tax is paid is called black money. Corruption is one of the major causes. All corrupt acts generate black money since the receiver does not want to show it as income to the tax authorities. This is why the finance ministry’s chief economic advisor, Kaushik Basu, even suggested legalising small-time bribes since it can at least be taxed.

Domestic corruption can be retail or wholesale. The retail one is what hurts most of us. The policeman who collects a bribe when you jump a red signal, the electricity board engineer who wants speed money to fix your meter, or the RTO official who wants a payment to issue a driving licence – such situations can be multiplied a million times.

We can also call this womb-to-tomb bribery, from birth certificate to death certificate. This retail corruption is what we are up against on a day-to-day basis. And this generates huge amounts of black money, mostly in the hands of thousands of government employees. This is what is not felt in developed countries. In the US or Europe, retail corruption that affects the common man is rare.

Then there is wholesale corruption, which is generated through the award of road/project contracts (as in Commonwealth Games) or the issue of licences or allotment of scarce resources like spectrum (as in 2G scam). Wholesale corruption also happens in government purchases – whether it is medicine in hospitals or books in schools or aircraft for Air India or Bofors guns or coffins for defence. Corruption happens even in the private sector, but since the losses are borne by promoters and shareholders, we should not bother about that now.

Why should I bother about wholesale corruption?

Wholesale corruption does not affect us directly, but it does impact us indirectly. When A Raja allegedly made money by underpricing spectrum and allotting it to specific parties, telecom companies had to recoup the costs from somewhere – it could be through higher mobile bills or poorer quality service, or both. Also, the government loses revenue, which means less money to spend on more worthwhile projects like subsidising the poor.

It is important to note that corruption generates black money but black money is generated even without corruption. For instance, if you do not collect the bill for your next petrol purchase you have generated black money. If you visit your doctor and pay him his fees without a bill, the doctor may not pay his taxes.

So the equation is corruption generates or implies black money but black money does not imply corruption.

Where is this black money kept?

Unlike what is shown in Bollywood films, black money is not kept in cupboards or suitcases – though some if it may well be kept there. Black money is usually kept in circulation by using it to finance informal trade and commerce – usually at a higher interest rate than what banks charge.

For instance, we estimate that only 30 percent of retail trade financing is done by banking institutions. The remaining money comes from moneylenders – a good portion of it from black money. Actually, domestic black money is a hidden reserve and it may also be beneficial in some ways as it finances economic activities. Also, black money circulates faster than white money, which slows down as it passes through the banking and taxation loop.

But black money distorts resource allocation since people with huge amounts of it will use it to build spas at home or buy Italian marble for the verandah or gold-plated bathroom fittings. The economy thus tries to cater to this profitable demand instead of what the bulk of the people need.

Moreover, black money is also stored in real estate, which is one reason why we are finding everything unaffordable in the property market.

If black money is useful here, how did it land up in tax havens abroad?

There are several reasons for keeping wealth abroad clandestinely. They can be broadly categorised as vegetarian and non-vegetarian reasons/purposes. The illegal wealth itself can be classified as veg or non-veg. The veg reasons for keeping wealth abroad include tax evasion, and keeping some dollars abroad for meeting expenses when you travel abroad or for your child’s education or daughter’s honeymoon.

The non-veg money is accumulated for terror financing or gun running or drug money or flesh trade. (Disclosure: I am a vegetarian and so I am categorising these purposes in this fashion.)  The former is illegal but less harmful compared to the latter. The government needs to approach the issue in different ways in tackling these two segments of black money. We will elaborate it later. Let us first look at the veg segment first, and how it emerged.

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